Back to Basics - How Life Insurance Works

   Premiums Paid - Cost of Insurance & Administrative Fees

   _______________

 = Cash Value

There are basically three major types of permanent insurance:

  1. Fixed Universal Life
  2. Variable Universal Life
  3. Indexed Universal Life

Fixed Universal Life

  • net of premiums paid flows into cash value
  • typically managed by the insurance company
  • credits a fixed rate
  • little downside of risk and little upside of benefit

 Variable Universal Life 

  • net of premiums paid flows into securities based funds
  • funds are chosen by the policy holder
  • performance is a function of the market's ups and downs
  • in good times, values can increase dramatically, but in bad times can drop dramatically
  • high risk with no floor on the downside

Indexed Universal Life 

  • net of premiums paid flows into cash value
  • performance is determined by an index such as S&P 500, Dow Jones, Industrial, Global indexes, etc.
  • upside benefit in a growing securities market but also has downside floor when markets are down
  • upside is usually capped to cover off the downside floor
  • ability to share in the up market, with the comfort of having a floor in the down market

Indexed Universal Life policies are becoming more and more popular because of the ability to share in the up market but at the same time provide a floor in the down market.